Chapter 7 – Activity-Based Costing and Activity-Based Management
7-47
Problem 7-29, continued
Cost Pool
Calculation
Activity Rate
Fabricating
a
$230,000
200,000 MH
= $1.15/MH
Assembly
b
$120,000
1,250 setups
= $96.00/setup
c. Balzene
Cost Pool
Calculation
Overhead
(20,000 units × 4 MH/unit) × $1.15
$92,000
Assembly
1,000 setups × $96
96,000
Total allocated OH
188,000
÷ units produced
20,000
OH per unit
$9.40
Galvene
Cost Pool
Calculation
Overhead
(20,000 units × 6 MH/unit) × $1.15
$138,000
Assembly
250 setups × $96
24,000
Total allocated OH
162,000
÷ units produced
20,000
OH per unit
$8.10
Balzene
Galvene
Direct material
$5.00
$3.00
Direct labor
16.00
24.00
Overhead
9.40
8.10
ABC cost per unit
$30.40
$35.10
d. The switch to ABC did not change the actual cost to produce
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
7-48
Problem 7-29, continued
change the reported cost of resources consumed to produce the
product.
e. The $35.10 activity-based cost of galvene provides Highland’s
SOLUTIONS TO C&C CONTINUING CASE
Case 7-30
b. First, calculate number of batches
Budgeted
production
÷
Units
per batch
=
Number
of batches
Pants
183,500
÷
50
=
3,670
Jerseys
66,500
÷
50
=
1,330
Jackets
18,000
÷
5
=
3,600
8,600
Second, calculate number of cuts
Batches
×
Cuts
per batch
=
Total cuts
Pants
3,670
×
4
=
14,680
Jerseys
1,330
×
5
=
6,650
Jackets
3,600
×
9
=
32,400
53,730
$161,190
53,730 cuts
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-49
Case 7-30, continued
reduced.
d. Unit cost will change for two reasons. The total cost for cutting
As indicated in part c above, reducing batches of jerseys without
e. Chad does not have enough information to justify purchasing the tool.
7-50
SOLUTIONS TO CASE
Case 7-31
a. Allocation based on materials cost
2014
2015
2016
Total
Government
contracts unit
$195,840.00
$228,749.50
$262,094.00
$686,683.50
Commercial unit
92,160.00
98,035.50
112,326.00
302,521.50
Total direct
materials cost
$288,000.00
$326,785.00
$374,420.00
$989,205.00
Allocation based on purchase orders
2014
2015
2016
Total
Government
contracts unit
$95,040.00
$104,571.20
$112,326.00
$311,937.20
Commercial unit
184,320.00
202,606.70
217,163.60
604,090.30
Total direct
materials cost
$279,360.00
$307,177.90
$329,489.60
$916,027.50
are incurred, and it is a better allocation base.
c. Since a purchasing agent (plus phone) is assigned specifically to
purchase materials for government contracts, these costs should be
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-51
Case 7-31, continued
will result in the best decisions for the company.
e. The IMA Statement of Ethical Professional Practice requires that
members act with competence and “provide decision support
presented unfairly and unobjectively. Following Mason’s directive will
compromise Lindley’s integrity and set her up for additional
ultimatums in the future.
Lindley will need to review the contracting requirements of the
Britt is in her best interest.